Month: August 2017

As August comes to a close, we’re taking a moment to reflect on the biggest fintech happenings of the summer. If you spent the last 12 weeks at the beach, here’s what you missed in the fintech world:

Tech Titans Pose a New Threat to FI’s

While startups continue to innovate in consumer finance, financial institutions should look to stay ahead by plugging into incumbent tech platforms, leveraging Google, Facebook, and Amazon as a front-door to acquire and engage customers. To understand the unique opportunities for today’s largest financial institutions, see our FAANGs in Finance series.

Bitcoin Rally Endures the Split

The price of Bitcoin is up 119% since May, to $4,700. In August, the currency split into two: Bitcoin and Bitcoin Cash. Skeptics warned the split would undermine public confidence in the technology and kill its price rally. One month after the split, that concern hasn’t materialized.

FinTech Funding Is Hot

Venture Capitalists continued pouring money into fintech companies, and 2017 is expected to be a record funding year. Here are some of the largest rounds announced over the summer:

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Over the past month, we documented the upside opportunity for Google, Facebook, and Amazon to build financial services products, following in the footsteps of their Chinese counterparts Baidu, Tencent and Alibaba. This week, we highlight the three biggest roadblocks we see for these companies to become vertically-integrated players versus platforms– Regulation, Compliance and Culture.

Regulation:

Can you imagine Google drug testing their 75,000 employees?

Banking and payment is largely regulated by the OCC which has an extensive list of types, there are a few alternatives for banking regulation such as a Thrift. Investing is largely regulated by the SEC, while lending, real estate and insurance are regulated on a state by state basis. Outside of the application time, review process and process/procedures required to be in place– the decision to be regulated requires careful consideration. All aspects of employee behavior, conduct as well as business practices become subject to regulatory audit.

Compliance

Can you imagine the CFO telling analysts that Facebook’s new bank will have a 5% cost of compliance?

Banks spend billions of dollars a year on compliance and risk control staff. While banks’ overall headcounts have shrunk considerably since 2007, compliance spending has more than doubled. This trend shows no signs of slowing down, with costs around risk and compliance expected to double again by 2022.

For the largest banks, compliance represents 3% of non-interest expenses. For smaller banks with less assets, compliance takes up close to 9% of costs. Even if Google, Facebook and Amazon build technology to automate most compliance and legal processes, they will still need to hire a couple thousand compliance officers, a huge hit to their bottom line.

Culture

For tech companies, the dollar cost of becoming a bank is nothing compared to the drag on their fast-moving culture and product development. These companies are already viciously competing to build the best messaging platforms, cloud storage, and digital advertising, to name a few. Becoming a regulated financial institution would put a speed limit on many of these projects, and suffocate their culture of asking for forgiveness rather than permission.

Lessons from FinTechs

Many of the most successful fintech startups reached critical mass without becoming financial institutions: think PayPal or Square. Acquiring a banking license takes at least 2 years, and these firms got a head start by avoiding it all together. Last year, British fintech Mondo opted to become a full-fledged bank, a transition that required them to raise an additional £20 million in funding.

While the OCC proposed a “fintech charter” that would streamline this process for growing startups, state governments sued, making slow, expensive banking licenses the only option for the foreseeable future. It’s no wonder most tech companies are opting out.

The Platform Path

While a financial license might be too much of a drag on their culture, we see an alternative path for Google, Facebook, and Amazon finance: the platform play. By building financial products that are compatible with today’s leading financial institutions, tech titans can capture the additional screen time of personal finance, without slowing down their agile, user-focused culture.

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Facebook’s closest Chinese counterpart is WeChat – a social network that acts more like a complete operating system than a single-purpose mobile app. Previously, we outlined three paths for Amazon to go into financial services, and how their business mirrors Chinese behemoth Alibaba. This week, we look at parallels between Facebook and China’s WeChat, extracting a few predictions for how Facebook’s product suite can enter finance.

WeChat is China’s dominant social networking platform, owned by TenCent. While it’s available for download worldwide, it has a vast set of functionalities inside China, acting more like an operating system than a single-use app. In China, its 800 million users can split a bill, book a cab, send cards, shop, and even manage their finances without navigating outside of WeChat’s app. For WeChat, these integrations boost in-app engagement, pull in revenue from service providers, and allow them to build financial products without becoming regulated.

There is a digital rat race to build the “WeChat of the West.” With Messenger, WhatsApp, and Instagram in its product suite, Facebook is currently the front-runner. Each of these products has its own set of advantages for Facebook to integrate financial services. Here are our thoughts on the potential of each:

WhatsApp:

Facebook acquired WhatsApp, and its 450 million users, in 2014 for $19 Bn. Founded and built by a Ukrainian immigrant, WhatsApp became hugely popular as a cost-effective way to communicate with people overseas and evade pesky SMS charges. Since waiving the app’s traditional subscription fee, $1 per year, Mark Zuckerberg has yet to monetize its huge user base, but that is likely to change soon.

With an international user base, WhatsApp is the logical platform for Facebook to test cross-border payments. It is already pushing to launch P2P payments in India, seeking to replicate WeChat’s success in Asia’s second-largest market. If P2P payments on WeChat succeeds, it will pave the way to add more value-add services into the app, like personal finance tracking.

FB Messenger:

At Facebook’s annual developer conference this year, the it-girl was not their social network, but their Messenger app. Facebook laid out their plans to embed business services into the platform, directly in line with WeChat’s strategy. Now you can order an Uber, book a reservation, or shop for new clothes, all within Messenger.

At the same time, Messenger has shown an appetite for P2P payments, and a propensity to help businesses boost their AI capabilities. These two strategies position Messenger as an ideal platform for financial institutions to integrate with. By creating new touch points in an app their clients visit daily, financial institutions can stay relevant to their daily lives and entertain them with custom, behavior-based offers.

Facebook:

Facebook is most likely to embed financial services in its core platform – Facebook. While people flock to Twitter and Snapchat to share live, sporadic updates, they still use Facebook to log the most important updates in their lives: having a baby, getting a new job, or relocating to a new city.

All of this data can help financial firms gain a deeper understanding of their clients lives, and tailor their messaging and marketing appropriately. From graduating high-school to becoming a grandparent, we share much more information with Facebook than we do with our bank. Integrating financial services onto Facebook can help banks avoid the “tone-deafness” that can irritate customers, and connect with clients on a personal level. With an older and more established user base, Facebook is an ideal platform for financial institutions to integrate financial planning and 529 products.

How far is Facebook Finance?

Unlike Amazon, Facebook’s patent applications (425 in the past year alone) have shown no clear intent to become a financial services provider. However, they have shown strong interest in integrating these services from third parties, most recently by acquiring an e-money license for the EU. Additionally, they’ve poached David Marcus, a PayPal executive, to serve as a VP of Messaging Products.

If Facebook Finance plays out in line with these early moves, it will create an opportunity for financial institutions to use the platform as their front-door. This will allow them to lean on Facebook for the front-end product, client insights, and AI capabilities, without causing it to be regulated. In return, Facebook will be rewarded by the boost in screen-time and engagement from its users. A win for both parties involved.